A reported agreement to halt the conflict between the U.S. and Iran and to reopen the Strait of Hormuz has the potential to reshape recent market leadership by easing energy-related inflation pressures and trimming Treasury yields, market participants said on Monday.
U.S. crude dropped to a three-month low on Monday after the announcement, while the S&P 500 rose 1.7%, leaving the benchmark less than 1% below its all-time high reached earlier this month. Investors and strategists suggested that lower oil costs could free up consumer spending and reduce one of the key inputs into headline inflation, supporting a wider range of stocks beyond the large technology companies that have driven recent gains.
"Easing in geopolitical tensions could alleviate some of the inflation pressures and reduce bond yields," said Angelo Kourkafas, senior global investment strategist at Edward Jones. "That can be the catalyst driving that rotation into cyclical sectors and areas that have lagged."
Among the groups cited as likely beneficiaries were consumer-focused equities and smaller-company stocks, along with markets outside the United States that are more exposed to energy-price swings. Retailers such as Home Depot, Target and Macy's were highlighted as potential direct beneficiaries of lower fuel costs for households.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said lower oil will reduce gas costs for consumers and help retailers. "The end of the war could help fuel the belief that consumers will have discretionary money to spend somewhere else," he added.
On Monday the S&P 500 consumer discretionary sector was up 1.9% in afternoon trading, while the small-cap Russell 2000 gained 0.9%.
Some investment houses moved quickly to reflect the changed geopolitical backdrop. Strategists at BCA Research said on Monday they were initiating a "tactical long" position in the consumer discretionary sector "on easing geopolitical tensions and oil-price relief."
Still, the prospect of a rotation out of high-flying technology stocks into cyclicals is not assured. Since the conflict escalated in late February, the S&P 500 technology sector has risen 28%, compared with about a 10% gain for the broader index. Technology remained the best-performing sector on Monday, advancing more than 3%, which underlines the challenge for lagging groups to catch up while the AI-related trade remains strong.
"A sustained ceasefire between the U.S. and Iran, combined with easing oil prices, could help the rally broaden beyond AI and tech," said Anthony Saglimbene, chief market strategist at Ameriprise. He added that on Monday, "investors appear most interested in bidding up established winners."
Several major banks and strategists flagged the potential for a broader advance in equities in the second half of the year if the macro backdrop holds. JPMorgan equity strategists said they were looking for market breadth to expand in the second half. "If our positive macro view plays out - underpinned by strong earnings, stable inflation expectations, and an easing of geopolitical risks in the second half - cyclicals should remain well positioned to outperform through year-end," their note said.
Morgan Stanley equity strategists also pointed to "relative strength" ahead for consumer discretionary goods, transport and regional bank stocks, where earnings trends are improving. "A broadening to under-owned cyclical groups is underway," Morgan Stanley said in a note on Monday.
Non-U.S. markets could be particularly receptive to the de-escalation. Manish Kabra, equity strategist at Societe Generale, said the end to the Iran conflict could be relatively better for other regional markets whose countries have been seen as more vulnerable than the U.S. to the spike in oil prices. "While recent shocks have reinforced U.S. resilience, the de-escalation in energy, with oil near about $80, could act as a catalyst for catch-up flows into ex-U.S. markets," he said.
Yet several strategists and investors warned that further market breadth may depend on shifts in interest-rate expectations. Markets swung early in the year from pricing in rate cuts to factoring in a potential hike as inflation rose with energy prices, and the path for rates remains central to investors' allocation decisions.
The Federal Reserve is expected to hold rates steady at its meeting this week, a backdrop that some market participants say may not be sufficient to induce a sustained rotation away from technology stocks.
"When you think about whether the rest of the market will outperform the AI story, I think for that, you may have to see rate cuts being priced in," said Sonu Varghese, global macro strategist at Carson Group.
Others suggested that a stumble in tech and the AI trade might be the clearest path for other sectors to gain ground. Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management, who holds positions in financial and healthcare stocks, said tech may need to falter for other areas to take the lead. "Where you’re going to get a boost in the rest of the market is from a stumble in the tech sector, in the AI trade," he said. "Tech has really just kind of sucked all the oxygen out of the room to this point to where it’s difficult for any other part of the market to do well."
Summary
The weekend agreement to end the U.S.-Iran confrontation and reopen the Strait of Hormuz pushed oil to a three-month low and lifted U.S. stocks, prompting strategists to forecast that lower energy costs could help consumer and cyclical sectors, small caps and some ex-U.S. markets to catch up with the recent tech-led rally. However, the dominant performance of technology, together with interest-rate dynamics, may slow any broadening of gains.
- Key points
- Easing geopolitical tensions and a reopening of the Strait of Hormuz sent crude to a three-month low and helped lift the S&P 500 by 1.7% on Monday.
- Consumer discretionary stocks, small caps and energy-sensitive foreign markets are cited as likely beneficiaries if oil stays lower and inflation pressures ease.
- Technology has driven recent gains - the S&P 500 tech sector is up 28% since late February versus a roughly 10% rise for the broader index - which could limit how quickly other sectors outperform.
- Risks and uncertainties
- Interest-rate trajectory: A broadening of the rally may require rate cuts to be priced in rather than the current steady-hold expectations; the Fed is expected to hold rates this week.
- Tech dominance: Continued strong performance in technology and AI-related stocks could keep capital concentrated in those sectors and delay rotation into cyclicals.
- Regional sensitivity: Markets outside the U.S. that are more exposed to energy shocks could see volatile flows depending on whether oil stays near current levels.